Sudden Debt

The global boom of floating trillions of new bonds in 2007-08 has - predictably - become an out and out bust this year, as the credit crisis takes a knife to the appetite for more debt. Notice that the amounts in the charts are net, i.e. after accounting for maturities.  

Despite all the talk of massive sovereign bailouts, the figures show that there is very little increase in the total amount of debt outstanding.

Here's a scary chart, one that I believe explains why the current Debt Crisis merits capitalization, and why it won't go away easily - certainly not by merely "printing" money and giving it to the FIRE sector (finance, insurance, real estate).

 USA:  Financial Sector Debt Soared Sixteen-fold Between 1952 and 2008

Fact: The debt crisis is global - and, yes, this includes the so-called creditor nations, such as China.  After all, in our fiat currency world it takes a debit in order to create a credit.  

The way we got into this mess is well known: the West foolishly (even criminally, if you ask me) gave up its industrial/manufacturing base and the high earned-income jobs it generated, replacing them with services and low value-added jobs.  However, it didn't lower its consuming and spending habits to balance the losses, instead it piled on debt from vendor nations, and constructed Rube Goldberg asset bubble contraptions that attempted to generate "wealth" out of thin air (e.g. real estate, derivative-based bonds, etc.).

 Anyone Still Making Anything in the US?

As the chart above shows, the process of de-industrialization is not new, at least not in the U.S. where goods-producing jobs have fallen steadily over the last 60 years, from 40% to 13.8% of total non-farm payrolls.  As a direct consequence (in my opinion) wage and salary income has dropped from 68% of total personal income to just a little over 50% (see chart below).

Consequently, total debt soared to 550% of earned income - even excluding debt of the financial sector (see chart below).



This chart raises one very important question: can the real American (and Western) economy sustain its debt load, or will it collapse under it? To put it another way: Is there life after debt?

The answer to this question involves much more than quantitative easing, classical econometric ratios, or Tea Party dogma.  We must go straight to the heart of the global " Permagrowth" economic paradigm, the one we have been using and abusing for well over a century.  In this outdated and obviously crumbling model, debt and growth are intrinsically linked, one becoming the enabler for the other in a sort of pushme-pullyou perpetual motion machine.

But it can't go on. Debt is a call on tomorrow's growth - and if such growth is impossible then the debt becomes untenable. The Earth's diminishing resources, benign climate included, can no longer sustain Permagrowth, therefore we cannot repay or even adequately service the immense debt/credit loads we have created.

Yes, there is life after debt.  But it will be very different from the consumerist Shangri La we had become used to.  I believe we are headed towards a low-intensity, decentralized type of macro-economic paradigm where energy and most consumer goods are produced locally from renewable sources, and where the sociopolitical system is likewise decentralized.

The important question is this: can such a paradigm shift be accomplished relatively smoothly and peacefully, or will it take a major upheaval? I really don't know..

P.S. On the eurozone: Dear Mrs. Merkel (or is it Ms.?), when your entire neighborhood is on fire it is not a good time to argue the bad structure and poor management practices of the Fire Department.  Rather, please make sure the firemen have plenty of water and leak-proof hoses.

The chart appears in an article in The Economist (Income Inequality in America:The 99 Percent), which includes the following passage:

The chart in The Economist article comes from a very interesting study done by the US Congressional Budget Office.  The following chart is on its cover.

From all the news flow out there it appears to me that we are nearing a so-called "inflection" point in the European debt crisis.  After a summer and early fall of spinning wheels to no end, European leaders are faced with a stark choice: finally do something serious, or watch the entire euro structure fall apart with unimaginable consequence for the European Union as a whole.

There is a eurozone summit meeting this weekend, to be quickly followed by another one three days later on Wednesday.  If the Franco-German axis (no, I do not use the term lightly) does not reach a mutually satisfactory agreement on Greece, expanding the EFSF and bank recapitalization then the inflection will point straight down.

The Battle for Europe is, tragically, being fought by generals who are well out of their depth.  They created a continent awash in funny money and a population that for decades felt entitled to their comfortable - albeit debt financed - lifestyle. Oh yes, even the holier than thou Germans;  I mean, how else could  those "other" Europeans afford to buy millions of BMWs, Airbuses and Miele washers exported by Germany if not through debt?  It's not as if Kalamata olives or jamon Serrano have much value-added, after all. And vacations in Terremolinos, Rhodes or Costa Brava are on perennial all-inclusive, cheapest-is-best  offer...

 Let's Hope It Doesn't Come To This, Again

Europe desperately needs a whole new cadre of strong and decisive leaders who will turn things around.  Maybe the current ones will see the light and pave the way for them by gracefully bowing out, after taking whatever steps are necessary right now to forestall implosion. But, I'm not holding my breath..